Rights v Debtor & Others

Indemnity from Debtor

There is an implied right of indemnity for the guarantor against the guaranteed/principal debtor.  This may be varied by an express right of indemnity. Until the guarantor has paid the creditor, the rights of indemnity are not a debt owed to the guarantor.

A person cannot make himself a creditor by volunteering to discharge another’s obligations.  It seems, however, that a guarantee given without a prior request makes the guarantor entitled to be reimbursed by the debtor if he can bring himself within the general principle which enables a person who is compelled to make a payment for the benefit of another and for which that person is liable and obtains the benefit, may recover payment from that person.

When the creditor has a right to immediate payment from the guarantor, the guarantor may require the principal debtor to pay the amount guaranteed in order to relieve him of his obligations, even though the creditor may not have demanded from him.  This principle applies even though the guarantor has paid nothing under the guarantee.

Action v Debtor

If the principal debtor fails to pay, the guarantor may obtain an order to compel him to do so.  It is not necessary that the creditor has refused to sue in order to obtain relief.

A guarantor may take action against the debtor and creditor to declare that he is relieved from further liability under the guarantee where this is the position as a matter of law.

The guarantor may have a right of damages against the principal debtor if he has a collateral promise from the principal debtor to pay the creditor on the due date.  The guarantor must pay any sum recovered to the  creditor, if he has not been paid.  If the debtor later pays a creditor even when overdue, he will not recover any substantial damages.

Rights Exercisable

A guarantor for a company’s debt may present a petition for winding up as a contingent creditor. If a guarantor pays the seller of goods, he may exercise the right of stoppage in transit in the name of the seller.

Where the guarantor pays on foot of the guarantee, he has a right of action against the debtor.  He may not bring his right of action forward by paying prematurely.  Payment would include where payment is procured by way of enforcement and realisation of execution.  The giving of a bond or security is not equivalent to payment.

By the Mercantile Law Amendment Act 1856, a guarantor who pays the creditor is a specialty creditor if the contract under which the original liability arose was made under a deed. A guarantor who pays off a preferential debt in bankruptcy or other insolvency process has the same priority as the creditor.

Amounts Recoverable

The guarantor’s right to indemnity is a right to recoup  the amount paid to the creditor with interest.  The guarantor may also recover any further damage he incurs as a result of being obliged to pay under the guarantee.

A guarantor who settles the debt for which he and the debtor are jointly liable may only recover the amount settled and paid.  The guarantor may not recover from the debtor in respect of the statute barred sums or sums in respect of a fraudulent, void or unlawful claim.

A guarantor may recover costs paid in defending actions taken by a creditor if he undertook the defence with the authority of the debtor or reasonably defended the matter in the interests of the debtor. If, however  he incurs unreasonable costs or defends for his own benefit, he may not recover the costs, or any amount unreasonably incurred.

A guarantor who has paid on foot of a guarantee may take independent proceedings or may join as a  third party in proceedings brought by the creditor.  It may be based on express indemnity where it exist or the implied indemnity above. The liability of the guarantor may be the subject of a set-off and counterclaim.

Contribution

A guarantor who has made paid more than his share of a common liability, may obtain contribution from his co-guarantors, if they are bound jointly and severally or severally or by the  same or different instruments and whether or not when they became bound, they knew that the other was co-guarantor or not.  This arises from equitable principles.  The substance of the position will prevail over form.

The right of contribution does not arise where the parties are not subject to a common debt.  There is no general principle that requires a person to contribute to an expenditure, simply because he has received a benefit from it.  Where persons are liable by different instruments for different parts of a debt due from the same principal, the guarantee may be separate.

The right of contribution may be negated where one person has become a co-guarantor at the request of another co-guarantor on the undertaking of the other co-guarantor to indemnify him against all loss.  These are circumstances where it can be implied that as between them, only one is to be liable.

There is no right of contribution against a person who became guarantor on condition of another signing as co-guarantor, when the condition was not fulfilled or where the person seeking to enforce it, has been guilty of fraudulent concealment.  However, a co-guarantor is not under any greater obligation.

Contribution Issues

The right to contribution after payment,  arises when the guarantor has paid more than his proportionate amount of the common liability. The right of contribution may arise before or after the guarantor has fulfilled the guarantee.  However, prior to the enforcement of guarantee, it is theoretical only.  He may prior to payment by action against his fellow guarantors force him to contribute towards liquidation of a common liability.  He may obtain a declaration of  his own right of contribution.

A guarantor may recover contribution notwithstanding that he has paid voluntarily and without threat of proceedings.  He must pay from his own funds.  Where he pays with the assistance of a third-party to whom security for the guaranteed debt are assigned by the creditor, both are treated as one and the guarantor must bring into account monies received in relation to the sureties.

The amount recoverable is determined by the number of solvent sureties.  Where each is liable for the same amount, they should contribute equally.  If not equally liable, they should contribute proportionately relative to the amount for which they were liable.

Where guarantors are liable by separate deeds in unequal amounts, none of them may be called to contribute beyond that for which he is liable under the terms of his own deed.

Interest is recoverable by the guarantor on  the sum due for contribution from the date when he has paid the creditor.

The costs incurred by a guarantor in defending his claim is not part of the contribution unless he has authorised in so doing or in defending the action is a prudent and reasonable course.

In claiming contributions, a guarantor must give credit, for anything received from the principal debtor by way of security or indemnity.

Securities & Contribution

A guarantor who has paid more than his proportion on a common liability may have the creditor’s rights and securities assigned to him whether or not satisfied for the purpose of obtaining the contributions.  This also includes securities received from co-sureties and he may accordingly recover contribution.

He is entitled to the benefit of securities which have been taken by another co-guarantor to indemnify himself against the common liability and also of a judgment obtained against the debtor by the creditor and the sureties.

A co-guarantor takes and brings into account what he receives by way of counter security from the principal debtor. It does not matter whether the other sureties were aware of such counter sureties.